Bank of Japan hikes policy rate, reduces bond purchases

The Bank of Japan on Wednesday announced the decision to raise interest rates and cut back on government bond purchases, seen as a big step taken to shift its monetary easing policy.

The BOJ has decided to raise its policy rate to 0.25 percent from the previous range of zero to 0.1 percent, which was set when the BOJ ended its negative interest rate policy in March.

The second policy rate hike this year, which was announced after a two-day monetary policy meeting, marked the first "additional rate hike" since February 2007, national broadcaster NHK reported.

The Japanese central bank also decided to halve its monthly government bond purchases to 3 trillion yen (US$20 billion) from around 6 trillion yen by March 2026, in a further shift toward policy normalization on the backdrop of a weakening yen.

The Japanese yen briefly jumped to the 150 level against the US dollar shortly after the announcement in the forex market during the day, hitting its highest level in over four months.

In its statement on Wednesday, the BOJ emphasized the necessity of adjusting the level of monetary easing to achieve a sustainable and stable 2-percent inflation target.

Should the economy and prices develop as anticipated, the bank intends to continue increasing the policy rate and modifying the degree of monetary easing, it added.

Following the rate hike, short-term interest rates are expected to climb to around 0.3 percent, the highest since the 2008 financial crisis. The move will affect household savings, mortgage rates, and corporate borrowing costs, local analysts pointed out.

At a press conference on Wednesday, BOJ Governor Kazuo Ueda highlighted the impact of the yen's depreciation on import prices, calling for attention to the risk of price hikes.

Regarding the reduction in government bond purchases, Ueda explained that while the long-term interest rate effects will be slightly diminished, the anticipated decline in the outstanding balance of government bonds by 7 to 8 percent over the next two years should mitigate significant upward pressure on rates.

In its July outlook report, the BOJ maintained its forecast that the consumer price index, excluding fresh food, will sustain a growth rate of approximately 2 percent through fiscal 2026.